SundayFiled under Dow Jones, US Treasury Bonds
I wrote this email to friends and family advising them to short the market and long US Treasuries on the 20 August 2008. Since then, those who have acted on my two cents have made a tidy profit (DJIA down 27%, Treasuries up 17%). Part of trading successfully is to audit yourself – so whilst I was reviewing my regular emails to friends and family I found this which I think is an interesting read. Note: DO NOT act on this article – it is now five months old. Below is the full email:
OK guys this is it. I think I’ve finally figured it out. I’ve been too focused on the end result without considering the process. Yes the usd will eventually die.. Yes commodities will have another big run…but it may be years away. If I keep on betting based on those themes I’ll lose all my money before I see those things happen. (addition: Jim Rogers have made these calls, but he is the worst market timer – and whilst Jim Rogers’ deep pockets can afford to be wrong and to hold out, my pockets may not be able to withstand the pain). This is what’s going to happen.
In the next year or two, the best trades will be to short the stock markets on rallies (DJIA 11450 at time of writing) and buy US treasuries (114^80 at time of writing) on dips. We are at the beginning of a bear market that will take it down a lot further. The US economy is in dire straits. This is not hard to explain. The interesting thing is going to be interest rates and treasury bonds.
Make no mistake. The feds CANNOT raise interest rates. If they do they will basically force bankruptcies of multiple banks and throw the financial system into disarray. In fact, they may even have to lower interest rates if things keep getting worse. The only ones benefiting from their 2% interest rates are the banks who can borrow money off them. No one else can borrow at those rates. If you walk into a bank and say “I want to borrow money”, do you think you’ll be able to borrow at 2%. HELL NO. The 15 yr fixed mortgage rate is 5.9%, and 1 yr arm rate is the same. So who benefits? The banks!
They DO NOT and WILL not raise interest rates. Why? Because the recession will take care of the inflation. When no one has money to buy, the supply-demand equation tells us prices will come down. I have read somewhere before that there has never been inflation in a recession. Secondly, even if there was inflation, do the feds care if you’re paying $5 for a can of coke. HELL NO! So whenever u see US treasuries dip with expectations of interest rate rises or high inflation numbers.. buy it! Interestingly enough the US treasuries has not moved the past couple of days even with the high CPI numbers – in fact the yields have actually fallen (ie. treasury prices went up). This maybe partly because people are expecting those numbers to come down with the fall in commodity prices but it’s probably also because they’re now onto the same realization.
What will come after this period of deflation and economic recovery will come a period of hyperinflation. When the economy recovers and people have money to spend again they’ll suddenly realize that with all this money printing that’s been going on now there are double the amount of paper money out there competing for the still same number of assets.. and prices will skyrocket! This is when all commodites will skyrocket. Gold especially, for gold is a currency.
So my mind is now clear. I will trade according to my suggestions above in the next couple of years. Hopefully make some money along the way. Then get set for the next bull run in commodities. I’m not sure right now how long this period of deflation will last. Will need to see how things pan out, but i think it’ll be at least a year or two, if not longer.
I don’t like betting against Philip Manduca so I don’t think I’ll get involved heavily in the currency market. he’s expecting the usd to do well against all other currencies over the next 6-9 months due to convergence of interest rates between the US and europe. With the US possibly raising interest rates and europe reducing interest rates. I have to say I disagree somewhat. I don’t think the US feds will be able to raise interest rates any time soon. So it may just be an adjustment because the USD has been so weak, and now that europe is in big trouble and the fact that europe will probably have to cut interest rates is in itself enough to make the usd recover against the euro. In the long term i’m still a yen bull. But you need to tread carefully in the currency market.
Let’s make ourselves enough money trading to retire at age 37 just like jim rogers did!
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